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Why is ArcelorMittal selling its Erdemir shares?

The special interest of the world’s largest steelmaker ArcelorMittal in Turkish integrated steel producer Erdemir is no secret.

In the privatization period of once state-owned Erdemir back in 2005, although ArcelorMittal also made a bid, Turkey-based OYAK won the tender paying $2.77 billion, an amount which was considered to be on the high side at the time. We know that ArcelorMittal continued to buy Erdemir’s public shares after the privatization. This was not a secret either. Consequently, ArcelorMittal’s stake in Erdemir reached about 24.9 percent and the company stopped buying further shares in order to avoid certain regulatory obligations.

Who would not want to own 25 percent of a profitable company like Erdemir? The purpose of this interest in ownership may not be only to collect dividends, while it would not be surprising if ArcelorMittal considered taking control of Erdemir one day. After all, ArcelorMittal is a company with a significant focus on Turkey, through various investments, including equal ownership in Borçelik with Turkey’s Borusan Group, partnerships in steel service centers, a majority share acquisition in Rozak as part of its involvement in the steel distribution business in Turkey, besides new steel service investments and assets in the packaging sector. Furthermore, ArcelorMittal’s Romanian subsidiary ArcelorMittal Galati is an active flat steel exporter to Turkey.

However, moving to the present, ArcelorMittal has reduced its stake in Erdemir to 18.7 percent in a first phase, and its ownership may decrease to about 12.5 percent in the coming period.

Why would a company with a significant interest in Turkey turn its back on Erdemir? ArcelorMittal may well have abandoned the idea of taking control of Erdemir or may have experienced some disappointments, but it would not be reasonable to say that it has turned its back on Erdemir completely, or on Turkey for that matter, in my opinion.

Commenting on the stake offering, ArcelorMittal board member and CFO Aditya Mittal said that they have decided to sell Erdemir shares in line with their declared group strategy of focusing on core assets and reducing net debt, which appears a quiet rational decision. In a similar case, Erdemir Group was once one of the partners of Borçelik, now known as ArcelorMittal Ambalaj Celigi, but they are not partners in the company anymore. Probably, Erdemir Group also made a decision to retreat from this non-core business, in order to focus more on their core business area, and so they sold all their stake and left the company. These kinds of strategic decisions are fairly common.

ArcelorMittal has recently decided to reduce its capacity usage or suspend production at some of its plants, particularly due to the depressed economic situation in Europe. However, the company continues some new and large scale investments in other plants within its core business. These investments certainly increase the need for funding.

All in all, the Turkish economy continues to grow, along with its steel consumption, and we think that this growth will persist in the years to come, provided there are no unforeseen developments. Erdemir production product groups constitute a large part in Turkey’s increased steel consumption. And ArcelorMittal is certainly aware that Erdemir is a prosperous company and that it will continue to be profitable. Hence, it would be ridiculous for ArcelorMittal to behave like a stock investor and sell Erdemir shares at maximum price just to bring in profits. As we stated above, a decision such as that taken by ArcelorMittal should be considered as a normal strategic business decision.